5 U.S. HOME CORPORATION

I frequently use Bloomberg’s data banks to run screens. I screen for companies that are selling at low price-to-earnings (PE) ratios, low prices to revenues, low price-to-book values, or low prices relative to other relevant metrics. Usually, the screens produce a number of stocks that merit additional analyses, but almost always the additional analyses conclude that there are valid reasons for the apparent undervaluations. During my career, I probably have run thousands of screens, but only a tiny fraction of 1 percent have resulted in a successful investment idea. Using screens to find investment ideas is like searching for a single pin in a field of haystacks.

In mid-1994, while screening for companies selling at large discounts to their book values, I came across the name U.S. Home, a builder of single-family homes. My early read showed that the company had entered Chapter 11 bankruptcy in 1991 and had emerged from Chapter 11 in 1993 as a profitable company with an average-quality balance sheet for a homebuilder. The company had a book value of about $27 per share and was earning about $2.50 per share. The shares were selling at about $17, or at only about 0.63 times book and 6.8 times earnings. Very low multiples of book and earnings are adrenaline flows for value investors. I eagerly decided to investigate further.

I noticed that the law firm of Kaye Scholer had represented U.S. Home in its bankruptcy proceedings. I knew the managing partner of ...

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